A Smart Way to Ride a Market Rebound

A comeback for stocks should translate into solid growth for Stilwell Financial, the company behind fund giant Janus

By Robert McMillan

Standard & Poor's Focus Stock of the Week is Stilwell Financial (SV ), which carries S&P's highest investment ranking of 5 STARS (buy). We at S&P believe that shares are poised for a significant increase driven by increasing investor enthusiasm for growth stocks, increased confidence in the management team and the shares' attractive valuation relative to Stilwell's peers.

Stilwell is a diversified, global financial services company that operates through its subsidiaries and affiliates in North America, Europe and Asia. The company operates mainly through its Janus Capital, Berger LLC, Nelson Money Managers and DST Systems units. Stilwell's businesses offer a variety of asset management, shareowner servicing, software solutions and related financial services to registered investment companies, retail investors, institutions and individuals.

Stilwell was formed in 1998 by Kansas City Southern Industries to serve as a holding company for its financial services division, a group of businesses that includes Janus, Berger, Nelson and DST Systems. Stilwell was spun-off from Kansas City Southern in July, 2000, and began trading as an independent public company.

Stilwell's principal subsidiary is Janus Capital, 98% owned, a leading U.S. investment adviser. Janus and its subsidiaries, with 25 equity, fixed income and money market funds, are investment advisers to the Janus Investment Funds, Janus Aspen Series, Janus Adviser Series, Janus World Funds Plc and Janus Universal Funds. Additionally, Janus is adviser or sub-adviser to other investment companies and institutional and individual private accounts, including pension, profit-sharing and other employee-benefit plans, trusts, charitable organizations, endowments, and foundations.

Janus accounted for about 96% and 89% of Stilwell's 2000 sales and earnings, respectively, and has experienced significant growth and established its name as a well-recognized brand in the industry. At the end of September, 2001, Janus had about $165 billion in assets under management, down from $305 billion a year earlier.

Berger Limited Liability Company, another entity controlled by Stilwell, serves as an investment adviser to the Berger Advised Funds as well as to institutional and private accounts. As of September 30, 2001, Berger had total assets under management of approximately $6.0 billion in its 12 Berger funds, sub-advised funds and private accounts, down from $8.8 billion a year earlier. Nelson Money Managers, 81% owned and based in the United Kingdom, provides investment advice and investment management services predominantly to individuals who are retired or contemplating retirement as well as tax preparation services and a stock option planning system. At the end of September, 2001, Nelson's $1.3 billion in assets under management were unchanged from prior-year levels.

DST Systems, 33% owned, provides a range of services that include information processing, printing and mailing, as well as computer software services and products to mutual funds, investment managers, and companies in communications industries and other service industries.


  Stilwell and other asset managers had a rough time in 2001. Stilwell's assets under management fell sharply, driven by market conditions, which were exacerbated by the September 11th terrorist attacks. As of the close of the market on December 31, 2001, the company's assets under management totaled $193 billion, up from $170 billion at the end of September, 2001, although still below the 2000 year-end level of $260 billion.

For 2002, we expect Stilwell to modestly increase its assets under management due to a combination of rising stock prices on an expected economic rebound and rising investor confidence, which should translate into greater mutual fund inflows.

We see higher assets under management contributing to a modest increase in total sales in 2002 from the $1.58 billion projected for 2001. We believe that continued cost reduction and containment programs will allow the company to increase operating margins. Net income should rise about 20% to $369 million in 2002, from a projected $306.7 million in 2001. We expect earnings per share to increase from $1.33 in 2001 to $1.68 in 2002.


  In 2001, the shares underperformed the S&P 500 index, falling about 31%. The weakness stemmed from a weak stock market, which resulted in lower assets under management and profitability. In addition, investor fears that Tom Bailey, the founder and current head of Janus, would exercise his right to put his shares of Stilwell back to the company and leave the firm also weighed on the stock. These concerns were alleviated in late November when Stilwell acquired all of Mr. Bailey's shares -- and Bailey agreed to remain with the company. Although the shares have recovered nicely from their 52 week low of $18.20 in October, the stock remains considerably below its January, 2001 high of nearly $46. Our six- to 12-month target price for the stock is $34.00, or about 20% above its current level. S&P still sees considerable upside for the shares. Stilwell is now being valued at about 16.9 times estimated 2002 EPS, which is at the low end of the range for investment management companies within S&P's STARS universe. The average asset manager covered by S&P is trading at about 19 times estimated 2002 earnings per share.

We recommend investors purchase Stilwell shares, which should benefit from a rebounding stock market and investor enthusiasm, increasing confidence in the management team, and a gradual narrowing of the shares' valuation discount to its peers.

McMillan is an equity analyst covering mutual fund firms for Standard & Poor's

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